The government has announced the ‘UK Offset Policy’ that will see overseas companies securing significant UK defence contracts to be required to invest back into the UK.

Commenting on the new strategy, Tom Saunderson, Partner specialising in defence, said: "It is an interesting policy lever, and the "bang for the British buck" framing tells you a lot about what is really going on here: with defence spending "com[ing] at a cost to the country", this is as much a politically palatable substitute for hard spending commitments as it is an industrial policy. 

"On one hand, it compels capital investment into the defence industrial base - skills, infrastructure, and capacity - that is desperately needed. On the other, by increasing the cost of entry into the UK market for overseas suppliers, you risk one of two outcomes: either deterring them altogether (and potentially leaving our armed forces without access to the best available equipment), or prompting them to pass some or all of those costs on. 

"The basic commercial reality is that suppliers must recover offset costs somewhere, and the most obvious place is the price of the primary contract. That will almost certainly inflate the price at which the MoD must procure. It may also place further pressure on the margins and cash flow of their UK-based suppliers, particularly if primes look to fulfil offset obligations by pushing risk and cost down the supply chain rather than making genuine new investment. Parliament has already raised exactly this concern, warning of increased costs and complex contract problems if the policy is applied without rigour.

"There is also a significant question mark over what constitutes a 'foreign defence contractor' in this context - made all the more acute by the fact that the rules are to be applied on a 'case-by-case' basis, meaning the definitional question will arise afresh on every procurement. The MoD has previously come under fire in spending statistics for classifying UK subsidiaries of international groups as domestic contractors, and the new policy's own definition, one which is based on UK footprint, workforce, facilities, and where work is actually performed, is precisely the test that a large international prime with an established UK subsidiary can satisfy without making any meaningful new investment. 

"Without robust auditing, genuine transparency around what has been credited and what has actually been delivered, and a hard requirement for demonstrable additionality, there is a real risk this becomes a box-ticking exercise rather than the industrial catalyst it is intended to be."

Craig Elder, Partner in public procurement who has previously worked on defence sector PFI projects, added: “Public-private partnerships (PPPs) have been used to great success previously in the defence sector as a mechanism for delivering innovation and quality without the taxpayer being burdened with high costs.

“Examples have included businesses providing mission-critical services to the Ministry of Defence for testing, training and evaluation, such as supplying target practice equipment and delivery to Armed Forces personnel, rather than this being operated solely by the military.

“Where infrastructure like military accommodation is involved, more traditional PPP programmes have been deployed along similar principles to the financing of new hospitals, schools and transport schemes via schemes like PFI.

“In these schemes, the private sector is responsible for the initial capital outlay that funds the upfront costs of the build, as well as ancillary services such as maintenance, then recoups this and agreed interest over time via an annual unitary charge.

“Whether this is the type of PPP model the government will use to increase defence spending without counting this as new borrowing remains to be seen, but it should be prepared to at least explore this option.

“For while PFI was criticised for perceived poor long-term value for taxpayers and windfalls for investors that refinanced debt at lower rates after the riskier construction phase, PPPs have evolved since it was closed in 2018. By embedding key principles like proportionate risk allocation, auditable social value, and strengthened governance and accountability, modern PPPs could have an important role to play in our future economy – including in the defence sector.”